The amount of debt you carry affects 30% of your credit score – the second largest factor after payment history – so your credit card balance clearly impacts your credit score. High balances can negatively affect your credit score because they increase your credit utilization ratio – the ratio of your credit card balance to your credit limit.
Some people, however, believe that carrying a balance is necessary to build a good credit score. Others worry that a zero balance may hurt their credit scores. Fortunately, this is not true – a zero balance will not negatively impact your credit score unless you have a zero balance due to not using your credit card. In this case, the credit reporting agency may stop sending updates to the credit report for that account, and your credit card may even be closed, both of which can affect your credit score.
Zero Balance and Your Credit Report
Having a zero balance on your credit card does not mean that a zero balance will appear on your credit report or that a zero balance will be used to calculate your credit score. The reason for this is that the details of your credit card are reported at different times throughout the calendar month (usually on the account statement closing date). Because of this, your credit card balance may not be $0 on the day the credit card issuer sends reports to the credit bureaus, depending on whether you used your credit card after paying the balance in full.
For example, if you purchased merchandise worth $100 on the fifth of the month and paid it off in full on the seventeenth of the month, but your credit report was updated on the twelfth of the month, your credit report will not show a zero balance. Instead, it will reflect the balance on the twelfth.
Note: Unless your balance is permanently zero, your credit report is likely to show a balance higher than what you currently carry.
Fortunately, carrying a balance will not affect your credit score as long as the balance you have is not too high (above 30% of your credit limit). High credit card balances are seen as riskier as creditors and lenders assess whether you can handle additional debt obligations.
Inactive Credit Cards
If you have a zero balance for several months because you do not use your credit cards at all, it may impact your credit score. When a credit card is inactive for several months or more, the credit card issuer may stop sending account updates to the credit bureaus. Without recent borrowing history reflected in your credit report, creditors and lenders will have difficulty estimating whether you are a responsible borrower.
Making occasional small purchases and paying them off in full can keep your credit card balance at zero and keep your account open and active for credit reporting.
Note: It is not necessary to have a zero credit card balance to achieve a perfect credit score. According to FICO, consumers with a perfect FICO score of 850 have an average credit card balance of about $13,000 and a credit utilization rate of 4.1%.
Multiple Credit Cards
Average consumers carry four credit cards with an average balance of $6,194. If you own several credit cards, each with a balance, paying one of those credit cards down to zero can help boost your credit score.
Taking
Calculating credit scores considers individual credit utilization on each of your credit cards and overall individual credit utilization. Paying off one balance in full reduces individual credit utilization across all your credit cards, showing that you’re not using the full amount of credit available to you.
Getting the Balance You Want Reported
If you plan to apply for a major loan soon and want to reduce your balance to improve your chances of approval, make a large payment on your credit card and do not make any additional purchases for a few weeks. This way, you can ensure a low (or zero) balance appears on your credit report, reflecting positively in your credit score.
Frequently Asked Questions (FAQs)
When should you close a credit card with a zero balance?
If you have a card with a zero balance, it may be tempting to close your account. Remember that your total available credit affects your credit score. Closing your account will reduce your available credit. However, that doesn’t mean you shouldn’t close a credit card. If you have a strong reason to close it, such as wanting to avoid accruing more debt or not liking the terms of the card, it may be better to close the account.
What is a credit card balance transfer?
A credit card balance transfer is when you move a balance from one credit card to another. Some cards offer introductory balance transfer deals. For example, some cards may offer 0% interest on balance transfers for 18 months. If you’re paying more than 0%, it may be beneficial to transfer the balance to the new card and pay it off before the interest rate increases, but you should be aware of the fees associated with multiple balance transfers.
Source: https://www.thebalancemoney.com/how-having-a-zero-balance-affects-your-credit-score-960530
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